ACH authorization is a convenient tool that lets users make electronic payments without visiting the bank. It’s also the most practical way to pay off a payday loan. However, the automated nature of such debits can give rise to dishonest practices and result in bank charges that exceed the loan interest.
What is ACH and How It’s Used in Payday Lending
ACH, or Automated Clearing House, is a transaction processing network used to transfer money between financial institutions. ACH frees customers from the need to write and send checks; they are also quick and cheap – or even free.
The most common types of ACH transactions include receiving salary payments and benefits via direct deposit, paying utility bills or mortgage, getting tax refunds, sending funds to retirement or brokerage accounts, and so forth. Banks usually aggregate a lot of small ACH payment requests together and process them in batches 3 times a day.
Payday lenders also make use of ACH. When your loan application gets approved, an ACH debit will pop up in your bank or debit card account. And when it’s time to pay back the loan, the lender will initiate an ACH withdrawal from the same account. In fact, nowadays you have to have a bank account that supports direct deposits via ACH to get a payday loan online.
What is ACH Authorization?
ACH debit authorization is a customer’s permission for a business to withdraw funds from their account. The authorization is given in writing by filling a special form and must be signed. The form must contain the customer’s full name, the name of the business (such as a payday lender), account number and routing number, withdrawal type (a single or recurring payment), the amount to be withdrawn, and – for recurring payments – the starting date and frequency with which the business can collect the money.
When taking out a payday loan, you will need to sign an ACH authorization, allowing the lender to withdraw the loan amount directly from your account once it matures. This is standard practice, but there are some serious issues and abuses that can arise if the creditor does not behave honestly or if you don’t have enough money in the account.
ACH Authorization Risks
If there isn’t enough money in the account at the moment when the lender initiates the withdrawal, the bank can either allow the transaction to go through, resulting in an overdraft, or reject it. Both are subject to high fees: around $35 per transaction on average.
If the creditor makes another attempt to withdraw the money after the first one is rejected, you will pay the $35 nonsufficient funds fee (NSF) again. This is usually higher than the interest on the loan itself! Pew Trusts found that 52% of payday borrowers had incurred overdrafts in the previous year, and for 27% of them, payday loans directly led to overdraft charges. While payday loans are sometimes advertised as a way to avoid overdrafting and the associated fees, in reality, borrowers end up paying both the lending interest and the bank charges.
According to a different study by Pew Trusts, 32% of payday borrowers suffered from at least one unauthorized withdrawal from their accounts. Often such withdrawals are made by the lender for some credit products and services that the customer hadn’t agreed to, but sometimes it can be fraudsters who buy personal information from lenders. In fact, 39% of clients reported that creditors had sold their personal information to a third party without their consent.
Bank Account Closure and Extra Charges
Sometimes borrowers choose to close their checking account altogether to stop the creditor from withdrawing the money, or due to unauthorized withdrawals. The problem is that, if the lender continues trying to collect the debt, the bank will still charge you an overdraft or non-sufficient funds fees. In addition, you’ll get in trouble with the creditor, who might transfer the loan to a collection agency.
Interestingly, lenders are often able to carry out ACH withdrawals even in those states where payday lending is banned. Banks don’t generally oppose this practice – indeed, they earn a lot of money on overdraft and NSF fees. A Bankrate study reveals that the total amount of overdraft fees collected by major banks in the US reached $11 billion in 2019.
Law Regulation in Payday Loan Repayment
Federal and state authorities have introduced various measures to protect borrowers from payday lenders’ predatory practices. The most important was the 2017 Rule “payment provisions“, issued by the Consumer Finance Protection Bureau in October 2017. It came into force in January 2018, and all payday lenders had to comply before August 2019; however, it was later replaced with the less harsh 2020 Rule.
One of the key provisions that remained from the 2017 version is that the creditor must inform the customer in writing before attempting to collect the money from the account. Also, the maximum number of failed consecutive withdrawal attempts that the lender can make is limited to two. This way, the borrower won’t have to pay the overdraft or NSF fee more than twice. Any new withdrawal attempt also requires a prior written notice if it involves a different amount, account, or is made on a different date.
As for specific state regulations, Delaware obliges lenders to wait at least five days to make a repeat withdrawal attempt if the first one has failed.
How to Prevent Payday Lenders from Withdrawing Money from Your Account
Revoking the ACH authorization
The customer has the right to rescind the ACH authorization given to the lender. To do this, first, check the original loan agreement and find the section that deals with ACH. It should contain instructions for revoking the authorization. If the agreement lacks that part, it is invalid, and you might be entitled to a refund of all funds withdrawn by the lender using the ACH Authorization.
The standard procedure is to contact the payday loan company by phone and tell them that you are revoking the authorization, and then send them a letter by certified or express mail. There is usually a deadline by which the letter needs to be sent in order to stop a particular scheduled withdrawal. You can find a sample letter on the CFPB website.
Note that you’ll still owe the creditor the same amount: the only thing that changes is that they won’t be able to collect it directly from the bank account.
The next step is to send a copy of the letter to your bank to inform them that you’ve rescinded the authorization. Normally you need to do this at least 3 working days before the loan payment is due in order for the bank to block it. You won’t have to pay anything for this service.
Stopping the Payments
If you didn’t make it in time to revoke the ACH authorization, you can still prevent the lender from withdrawing the money. For this, you’ll need to use a so-called stop payment order.
There are several ways to give a stop payment order to the bank: by phone, via mail or e-mail, and by coming to a branch office yourself. Note that this service is subject to a fee.
Once you’ve revoked the authorization or issued a stop payment order, make sure to watch your account carefully on the day when the payment was originally due. If the lender still attempts a withdrawal, contact the bank at once. You should be able to dispute the transaction and get the money back.
If you provide your payday lender with an ACH authorization, make sure that your account balance is always sufficient to make a payment to avoid overdraft charges. Alternatively, revoke the authorization in advance – but remember that you’ll still need to pay in one way or another.
By contrast, if you are one of those 12 million people in the US without a bank account, you can still get a payday loan from a regular storefront lender.
Remember, however, that payday loans are associated with high costs and can land you deeper in debt, so it’s worth considering alternatives.